Pharmac: The politics of playing god

LIFE-SUSTAINING: Aotea College teacher Sam Forward, who has a type of blood cancer, relies on a Pharmac-supplied medication that costs him nothing.
CRAIG SIMCOX/Dominion Post
LIFE-SUSTAINING: Aotea College teacher Sam Forward, who has a type of blood cancer, relies on a Pharmac-supplied medication that costs him nothing.

As New Zealand enters free-trade negotiations involving the United States, our drug-buying agency, Pharmac, is in the gun. The US wants major reforms to Pharmac's drug-buying monopoly. Nikki Macdonald investigates what Pharmac does and the potentially life-and-death decisions it makes.

It's hard to imagine a worse 25th birthday present than being told you have slow- creeping blood cancer.

But Sam Forward was lucky. By the time he went to the doctor for persistent headaches two years ago and was told he had chronic myeloid leukaemia, the innovative drug Glivec was already publicly funded.

It was one less thing to worry about. The drug turns up in the mail and he doesn't pay a cent of its $57,600 annual cost.

"If I had to pay for it, it would not be an option. It's more than my annual salary. Pharmac is doing a good job in making sure the funding is available."

The Aotea College PE teacher's coping mechanism is to pretend he's not sick. With free access to the best treatment, he can keep teaching sport and be a dad to 10-month-old Sophie, in exchange for 15 minutes of daily nausea, and trading his beloved rugby for golf.

The funding of Glivec in 2002 illustrates the value of government drug-buying agency Pharmac to the average Kiwi.

Without it, people like Mr Forward would face insurmountable drug bills. New Zealanders had to wait longer than Australians before getting free Glivec, but Pharmac's aggressive pricing policies enabled it to fund the drug without blowing its tight budget.

Pharmac usually features in public debate only when being lambasted by patient groups for failing to fund the latest and greatest drug for their condition. But there's growing acknowledgement that, as Heart Foundation medical director Norman Sharpe says, "Pharmac do a difficult job very well".

However, Pharmac is a potential obstacle to a free-trade agreement with the United States. The US Government - heavily lobbied by its drug industry - wants major reforms to Pharmac's drug-buying monopoly as the price of the Trans-Pacific Partnership trade deal between Asian and Pacific countries, which the US is negotiating to join.

Just last month, 28 US senators wrote to President Barack Obama calling for free-trade talks to crack down on national drug-buying bodies using "arbitrary and non- transparent practises" which harm US companies.

Prime Minister John Key has made appreciative noises about Pharmac's value, but refuses to rule it out of trade negotiations. Labour leader Phil Goff says the drug-buying agency should not be sacrificed for a trade deal with the US.

The situation has triggered vocal support for Pharmac from big- name Kiwis such as economist Gareth Morgan and Wellington businessman Lloyd Morrison, who travelled to the United States in 2009 for leading-edge leukaemia treatment. Despite seeking treatment overseas, he's a fan of Pharmac because he feels it gets the best value for limited drug dollars.

Thomas Faunce, associate professor at Australian National University's colleges of law and medicine, has studied the impact of Australia's 2005 bilateral free- trade agreement (AUSFTA) on its Pharmac equivalent, the Pharmaceutical Benefits Scheme (PBS). Asked how worried we should be about the prospect of significant change to Pharmac, he is unequivocal: "You've had a terrible earthquake, what's another catastrophe? People don't understand how important Pharmac is."

Pharmac was established in 1993, to rein in rocketing drug costs and distance the government from drug-buying decisions. Its task is to spend its $710 million annual budget to achieve the best health gains for Kiwis.

Broadly, Pharmac works by referring drug-company funding applications to the Pharmacology and Therapeutics Advisory Committee, made up of senior doctors and pharmacists, to examine whether or not the drug is effective, and whether it is significantly better than anything else already on offer.

The committee then gives the drug a low, medium or high funding priority and Pharmac's board decides whether or not its benefits justify the price tag.

Pharmac's cost-benefit analysis, which takes into account average patient age and the number of good-quality years gained by the treatment (called quality adjusted life years, or QALYs), is similar to that in Australia's scheme.

The major difference is that Australia funds everything meeting a given cost-effectiveness threshold.

New Zealand, on the other hand, has a fixed budget, so has to decide whether it can afford to fund a drug in any given year. Pharmac must also consider the opportunity cost of a funding decision - what do you sacrifice to spend $20 million on the latest cancer drug?

Pharmac uses various bargaining strategies so it can buy more for its drug dollar. These include:

Reference pricing: Where a newer, patented drug has similar benefits to a cheaper generic drug, Pharmac might subsidise the newer drug only to the same level as the lower-cost alternative. The drug company then either drops its drug price to the subsidy level, or the consumer pays the difference.

Sole-supply tenders: When a drug patent expires, Pharmac tenders to get the best price for a generic replacement. Drug companies can offer much cheaper deals because they're assured of a large market share.

A 2004 price comparison found Australia paid up to 20 times more

than New Zealand for some generic drugs, because it did not use tenders. (Legislation has now bridged some of that difference, by enforcing staged price drops for generic drugs.) A Canadian study found generic drugs were up to 93 per cent, and on average 58 per cent, cheaper in New Zealand.

Package deals: A costly new drug that works well but is not cost-effective can be funded by negotiating cheaper prices for other drugs made by the same pharmaceutical company. Glivec was funded using this method.

Negotiated contracts. On the numbers Pharmac has been spectacularly successful. In 1985, a basket of commonly prescribed drugs cost 37 per cent more in New Zealand than in Australia. Between 1993 and 2006 New Zealand's drug spending grew by 11 per cent, while Australia's soared by 212 per cent. Pharmac estimates its aggressive pricing policies save almost $1 billion a year.

But at what cost to patients?

CANCER Society medical director and Christchurch cancer specialist Chris Atkinson almost daily finds himself wanting to prescribe a drug that is not subsidised by Pharmac. How do you tell a patient clutching a thick sheaf of papers pulled off the internet that they can't have the drug their research recommends?

Even Pharmac chief executive Matthew Brougham concedes choice and speed are casualties of the system. A 2010 comparison found New Zealand offered 81 drug products within five major drug classes, whereas Australia's PBS funded more than 650. That's frustrating for patients, and oncologists, who attend international meetings where everyone is discussing the new treatment they're using, Professor Atkinson says.

The most obvious example of patient anger was the massive campaign to fund breast-cancer drug Herceptin. National bowed to political pressure and, for only the second time in Pharmac's 18-year history, overruled the agency's decision not to fund a 12-month course of the drug.

Depending on your perspective that was either a victory for public advocacy or a clear illustration of the need for an independent body basing funding decisions on scientific evidence rather than emotive argument.

With cancer knowledge said to double every 2.7 years, Professor Atkinson promises there will be more Herceptins. But he's not in favour of single-drug campaigns. And he can see the value of Pharmac to a small country which cannot afford everything. For example, New Zealand gets one of the best prices worldwide for ondansetron, commonly used to quell nausea in chemotherapy patients.

"It's a difficult mix. On balance, Pharmac is doing quite a good job. It's very easy to have an epithet saying big pharma [pharmaceutical companies] is very bad because all they're doing is wanting big profits. Actually these drugs do cost an immense amount to produce. You can't just make Pharmac or the pharmaceutical companies the enemy."

The Heart Foundation's Norman Sharpe takes a similar view.

Pharmac's bargaining process means New Zealand gets cholesterol-lowering statin drugs at about one sixth of the price of Australia. With around 350,000 Kiwis taking the drug, any small price increase would cut into the total drug budget.

"We get very good value," Professor Sharpe says. "The downside is there has been a lot of frustration because we have more limited choice than Australia and other countries. But we still have very good choice."

The other disappointment is that lower drug margins have pushed some drug companies out of New Zealand, he says.

While Douglas Pharmaceuticals would not comment, it told National Business Review in 2008 that Pharmac's "draconian" policies had forced it to switch its focus to exports. New Zealand's drug industry employs nearly 900 people and its revenue has increased four-fold in the past decade.

John Forman, of the New Zealand Organisation for Rare Disorders, also lauds Pharmac's ability to get value for the drug dollar, but argues the system doesn't work for rare conditions affecting only a few patients.

The organisation has launched a campaign for funding for treatment for people with lysosomal (enzyme deficiency) diseases, who can presently access only one out of five new enzyme treatments.

"We're getting really frustrated with what we think is the real runaround we've been getting. If there's only one, three or five patients it's almost certainly not going to fit the standard cost- effectiveness framework. The fact that they do some things very well does not mean they do all things very well," Mr Forman says.

Mr Brougham acknowledges that so-called orphan drugs, for rare diseases, are problematic for Pharmac. "They do present a challenge. Drug companies can't defray the development cost over large populations, so cost per patient tends to be quite high."

Pharmac's exceptional circumstances scheme, which allows discretion in such cases, is under review. Mr Forman fears the scheme will become more restrictive, rather than less.

OVERALL, University of British Columbia health economist Steve Morgan found there was little evidence Kiwis have worse health because of Pharmac's restrictive policies.

He found patients were more likely to be adversely affected by having to pay a higher portion of the drug price (up to $27 in Australia compared with $3 in New Zealand).

The alternative, a US-style open drugs market, hardly looks a great bet for improving the health of all Kiwis. A 2008 Commonwealth Fund study of 19 industrialised nations found preventable deaths fell, on average, 16 per cent from 1997 to 2002. In the United States the drop was just 4 per cent.

It's hard to imagine a trade carrot that would compensate for Pharmac's abolition. The Australian experience provides some clues to likely trade-negotiation pressure points.

Associate Professor Faunce, who has studied both the impacts of AUSFTA and potential impacts of the Trans-Pacific Partnership, argues the greatest impact on Australia's drug-funding system came as an indirect result of the trade deal. AUSFTA created a joint Australia-US "medicines working group", which recommended a two-tier system, which was then rushed through Parliament.

The change split the drug schedule into "innovative" and "generic" medicines. While the move was intended to force down Australia's high prices for generic drugs, Associate Professor Faunce argues it has eroded the country's reference pricing savings. There is now no reference pricing between the groups, so patented drugs can no longer be compared with, and priced according to, similar generics, even if they offer no greater benefits.

Another change was the requirement for the drug safety regulator to notify a patent holder when a competitor seeks approval for a new generic drug. Overseas, this has spawned "evergreening", where the patent-holding company then claims further patents based on dubious grounds such as pill colour and dosage, and sues generic makers for patent breach.

In Australia, the government was forced to legislate to prevent patent holders using that notification process to then block generics entering the market.

In New Zealand's case, Pharmac's competitive tender process will come under fire, Associate Professor Faunce predicts.

"They hate that, because it's genuinely competitive. You have to stand up to these bastards. They come into these things and slam down a document and say here's the deal, you can nibble around the edges."

WELLINGTON economist Gareth Morgan is all for free trade, but is equally worried at the prospect of any concessions to United States pharmaceutical companies in the course of free trade talks.

Pharmac, he says, is "pretty cool". "They put the money where the greatest need is. You can't ask any more than that." In fact, he'd like the model replicated across the health system.

"It's still a very politicised system. Being the minister of health is the kiss of death because demand is infinite. You have to allocate, but the politicians shouldn't be making those decisions, because they're reactive to those emotional reactions."

In that wish Mr Morgan has an unlikely ally - Medicines New Zealand, the organisation representing drug companies and leading a PR offensive calling for changes to Pharmac as part of the free trade deal.

Medicines New Zealand general manager Kevin Sheehy says he is not advocating axing Pharmac altogether. Neither is he pushing the argument of his organisation's predecessor, the Research Medicines Industry, that New Zealand spends comparatively little on drugs, therefore Kiwis miss out.

Drug companies, he says, are simply pushing for greater transparency, accountability and openness to innovative medicines. At present, a drug application can sit on Pharmac's list for years with no time frame for a final decision. A flat "no" would be better than endless uncertainty, he argues.

Asked if the public could in return expect greater transparency from drug companies about the degree to which they fund patient and lobby groups, Mr Sheehy says the organisation will consider the issue.

He also advocates a review process, such as that introduced under the AUSFTA. Trade negotiators campaigned for a binding appeal process, but that was thrown out in favour of a non- binding independent review. The process has only been used twice in Australia, and in both cases the funding decision was unchanged.

Mr Sheehy rails against package deals and calls for more information justifying Pharmac decisions and the ability for international experts to present directly to Pharmac's committee of doctors.

Though criticising the Pharmac process, Mr Sheehy agrees the whole health system should be subject to cost-effectiveness assessment. Part of his beef with Pharmac is that other areas are not subjected to the same rigorous process. For example, a drug which costs $15,000 per QALY could be deemed not cost-effective, whereas the health system funds dialysis at $50,000-$100,000 per QALY.

But one thing hasn't changed - Medicines New Zealand's message is still that New Zealand could and should invest more in medicines.

Matthew Brougham takes an opposite view. The drug pipeline looks sparse, and new drugs tend to offer ever-smaller benefits rather than treatment revolutions. There may soon come a point at which drug dollars would be better invested elsewhere in the health system, he says.

The fact he can say this is perhaps the strongest argument to fight to retain a drug-buying agency that makes funding decisions on cold, hard facts.


6AM in Wellington: A cold sensation in your throat would hardly be unusual. But what piqued cyclist Paul Peacock's concern was that the feeling disappeared whenever he stopped pedalling. When he hit the Basin Reserve and couldn't go any further, he knew something was seriously wrong.

"I lived in Berhampore and it was all downhill. 'I've got a problem Houston'."

At 34, it was a a shock to discover he had 99 per cent blockage in his main artery. He had two stents inserted and has to take preventive drugs for life. That includes cholesterol-reducing statins - one of Pharmac's biggest success stories.

Through a range of pricing strategies, including aggressive tenders, it has driven down statin prices to about one-sixth of what they cost in Australia.

For Mr Peacock that's doubly important. He works as a cardiac rehab nurse at Wellington Hospital and coaches heart patients to exercise, eat healthily, and take preventive drugs. About 40 per cent of his patients stop taking their medications within two years, because they feel better and tire of the pills. Any price rise would exacerbate the problem.

"I regularly see patients coming back in with further events primarily because they've stopped taking their medications.

"The one benefit we have in New Zealand is that the cost is fairly neutral. Pharmac do a good job in that, compared with Australia, US and British costs. It makes a big difference. I've got patients where cost is an issue for them to get prescriptions even on subsidy."

Having worked in a teaching hospital in Arkansas catering for poor patients without health insurance, Mr Peacock has seen the alternative to a public drug buying agency - and he's no fan.

"I had a patient who collapsed and had to be resuscitated and have surgery, all because he couldn't afford a couple of tablets at the end of the month."


When Pharmac chief executive Matthew Brougham explains what he does for a living, the standard response is, "I wouldn't want that job for all the world."

Which could be why he resigned on Thursday.

He stuck out at the role for five years, despite admitting that, when he started at Pharmac 14 years ago, he thought there was not a chance in hell he'd want the top job. "It just seemed too big and too difficult."

And difficult it has been, but also rewarding.

"I've never come under personal attack. Obviously at times there are heated exchanges. I'm trying to do my best to be a dispassionate assessor of the evidence. All of us who have done science degrees know you're never going to get rid of all the biases."

A zoology graduate with a long public policy background, Mr Brougham is refreshingly candid about Pharmac's benefits and limitations. As a drug consumer who has just had to change brand when Pharmac switched to a cheaper alternative, he empathises with Pharmac patients.

And he has spent time on the opposite side of the debate, pushing drugs for two years as a pharmaceutical rep in the 1980s. "It felt like a valuable role, providing, if not unbiased information, good information, I thought."

Mr Brougham is leaving to join his partner in Canada, where he will work at the Canadian Agency for Drugs and Technologies in Health, which assesses but does not buy drugs.

The Dominion Post